4/23/2010 @ 9:00AM

Those Bullish Spreads

If you’ve read me you know I’m bullish, and you know why: Sentiment is snarky, skeptical and pessimistic at a time emerging-markets-led global growth is stronger than folks think. But there are many reasons to expect a good return on stocks in 2010. Here are five you likely haven’t heard elsewhere.

The GDP-weighted global yield curve (spread between long-term and short-term government interest rates) is steeper than it has been since the 1960s. This is bullish because it reflects future eagerness to lend. Banks borrow short-term money and lend long term. A wider spread means fatter bank gross operating profit margins on future loans, hence increased future lending. This has historically been a great market-timing tool.

Further, the spread between ten-year Treasury yields and the average cost of credit default swaps has narrowed to zero. (Two years ago CDs rates were 0.75 percentage points above T note yields.) That means the economy is keyed to expansion and credit demand more than recession and bankruptcy risk. That’s bullish.

Item three: In March junk bond offerings hit a record level of $37.8 billion. Low-quality midsize firms couldn’t borrow a year ago. Now they can. Small businesses will be next. Bears used to complain that low-quality firms can’t borrow. Now the argument is that all this borrowing is risky. They can’t have it both ways. They have succumbed to the pessimism of disbelief, which I discussed last month. When you hear pessimism taken to such excess, you know you should be bullish.

Item four: The purchasing manager index, a widely watched leading economic indicator for America, is mostly ignored overseas. It applies everywhere and is wildly expansive in emerging markets. Those markets (India, China and Brazil, among others) make up more of global GDP than America does.

Last point: People are misreading the financial crisis in Greece. What they take as a source of despair should in fact be cause for reassurance. Greece, as messed up as it is, can still borrow. The pessimists are forgetting that as recently as 20 years ago responsible borrowers like Germany were paying as much to borrow money as shaky borrowers like Greece and Italy are paying now. Fear of a false factor is always bullish.

Five reasons! I get only so much space here or I would prattle off another 15. Look for more in future columns.

Bulls should look at underappreciated stocks like these five.

Aluminum Corp. of China
, a.k.a. Chinalco (ACH, 28), which I recommended last May at 18, is still a good buy. It’s China’s largest producer of alumina and aluminum. In the global marketplace it ranks second in ore production and third in the metal. Dominant, low cost and a pure bet on China’s growth, it doesn’t seem cheap at 25 times this year’s earnings. But earnings are depressed. I’d bet it’s at 7 times 2011 earnings.

Chile’s
Endesa
(EOC, 48), an electric utility, is 60%-owned by
Enersis
, another Chilean electric utility with a broader product line and distribution, which I recommended Jan. 18. Endesa is worth owning on its own. It produces electricity at low cost (a lot of it from hydro) and operates throughout South America’s growth markets. For a growth stock, it’s cheap at 12 times my estimate of this year’s earnings.

Magyar Telekom (MTA, 20) is Hungary’s best-run firm, providing landline and mobile-telephone service in Hungary, Macedonia and Montenegro. It’s about to start a stock buyback program, which should push the stock up. It sells at ten times 2010 earnings and what should be more than an 8% dividend yield; buy before the Apr. 28 ex-date (typically MTA only pays out once per year).

H&R Block (HRB, 18) is just ending a bad tax season hurt by do-it-yourselfers. Buy for 2011. It’s the clear leader in tax prep, a business sure to grow as governments make taxes ever more complicated. With 24 million customers worldwide, it’s way ahead of competitors. Its stock is at ten times my estimate of this year’s earnings and has a 3.25% dividend yield.

Germany’s Aixtron (AIXG, 36) is a leader in vacuum deposition equipment sold to chipmakers, mostly Asian ones. It was expected to get creamed in the recession but managed itself so well I expect it is soon to be seen as a true glamour stock, more than making up for its P/E of 28 on 2010 earnings. This stock carries more risk than most of the ones I recommend, but I think it will work out.

Money manager Ken Fisher’s latest book is How to Smell a Rat: The Five Signs of Financial Fraud (John Wiley, 2009). Visit his homepage at www.forbes.com/fisher.